Published: August 26, 2013 at 1:44 pm

Despite North American oil production picking up in the past few months, the global scene presents a different picture. Inventories and spare capacity in oil producing nations have fallen to a bare minimum. In other words, global crude oil production hasn’t commensurately kept up with end demand. As a result, crude oil prices are moving north.

Why high crude prices are here to stay
The current tightening in the market is mainly due to supply disruptions in Libya and Iraq. Because of this, Goldman Sachs expects the internationally traded Brent crude price to hit $115 per barrel any time now. The international benchmark has consistently topped $110 per barrel in the past few weeks. Additionally, according to data available from the Energy Information Administration, crude inventories at Cushing, Okla. — the storage hub of the West Texas Intermediate — have declined for the seventh straight week. At 37.4 million barrels, this is a 28% drop, from the record highs of nearly 52 million barrels in stockpiles in January.

This is in tune with the International Energy Agency latest report which shows U.S. oil demand has increased at its fastest pace over the last two years. With the economy showing signs of recovery, the energy watchdog expects U.S. oil consumption to increase for the rest of the year.

Still, it must be kept in mind that global supplies are expected to remain tight in the long run due to increasing demand from emerging economies. In fact, energy research firm Wood Mackenzie expects China to replace the United States as the world’s biggest crude oil importer by 2017. With tighter supplies — thanks to the end of easy oil — and higher demand, oil prices are likely to take an upward trajectory.

Who could benefit from high oil prices?
Obviously, exploration and production companies have a solid advantage here. However, the best positioned ones are those with access to larger and strategic resources, as well as maintain a cap on costs incurred. Operators having lower costs of development on a per-barrel basis hold a huge competitive advantage.

Of course variations do exist. However, holding large reserves that can be developed at a comparatively cheaper rate translates into superior returns. Houston-based EOG Resources Inc (NYSE:EOG) has done exactly that. An early mover in the U.S. shale oil revolution, EOG Resources Inc (NYSE:EOG)’s Eagle Ford exposure has ensured the best returns for a U.S. oil company this year.

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